Why is liquidity “passing through” the global economy in such a segmented, non-neutral fashion?

“It is fair to say that the Fed has created a marvellous environment for virtually all assets, even if this remains one of the weakest economic recoveries on record in the US and through virtually all of the developed markets,” wrote Deutsche Bank in a note.

European high yield, or “junk”, corporate bonds have fared best, producing total returns of more than 150 per cent. Among the few losers were owners of Greek shares.

And yet the eurozone may be approaching deflation and has exhibited weak nominal gdp growth.  From the FT there is more here.  You should be certain about the appropriateness of the taper — or not — only if you understand this issue better than any human being I have met or heard or read.  I wonder if that’s you.

Milton Friedman, some time ago, wrote that money was for the most part neutral, and that the new money rapidly mixes in with the old.  That made sense to me at the time, and it nudged me away from Austrian views, yet we have seen decidedly non-neutral effects from the various QEs and the periodic taper talk.

(Where does this non-neutrality come from?  Do liquidity injections swing to concentrated areas in financial markets when an underlying economy has not solved what Arnold Kling calls its “PSST problems“, and/or when rates of return are low?  That is speculation.)

Note that Michael Woodford supports the taper, and Stanley Fischer has called for the same (“It would be good to start“).  They are the leading experts on this question, along with Bernanke himself of course, and each also appreciates the potential benefits from monetary stimulus.  Donald Kohn wants to delay the taper but refers to it as a “close call.”

Here is another opinion:

“The best argument for tapering sooner rather than later?” Peter R. Fisher, senior director at the BlackRock Investment Institute, wrote in a recent analysis. “The Fed is running out of stuff to buy.” He estimated that if it maintained the current level of asset purchases, the Fed could soon be consuming all the new issuance of Treasuries and mortgage bonds.

Is this the methadone for withdrawal from QE?

Overall, we don’t have a very good understanding of the different ways in which economies can build up imbalances.  Unfortunately, we may soon learn more.

Update: There is indeed a new tapir.